At its heart, financial trading is no different to any other form of trading: it is about buying and selling in the hope of making a profit. Here’s a rundown of the key concepts, participants and markets involved in financial trading.
What is being traded?
Financial trading involves the buying and selling of financial instruments. These can be cash instruments, like shares, forex or bonds. They can also be derivatives, such as CFDs, futures or options.
Whatever the instrument being traded, the intended outcome is always the same: to make a profit. To do this, you usually buy low and sell high. If you sell an instrument for less than you bought it, you’ll make a loss.
Who is doing the trading?
In financial markets, millions of companies, individuals, institutions and even governments are all trying to profit from buying and selling financial instruments at the same time.
This means that the prices of those instruments tend to constantly be on the move. A market that moves a lot is known as a volatile market. These markets bring more opportunities for profit, but also mean increased risk.
Where does trading take place?
Financial instruments can be bought and sold in one of two ways:
- They can be traded on exchanges, highly organised marketplaces where a particular instrument is bought and sold (like the New York Stock Exchange)
- Or they can be traded over-the-counter, when two parties agree to trade instruments with each other (like when you trade CFDs with a provider)
Risk is a key concept to all types of financial trading. No matter what instrument is being traded, who’s trading it or where the trade takes place, balancing potential profit against risk is what trading is all about.